27 Aug Lombard Company Is Contemplating The Purchase Of A New High-Speed Widget Grinder To Replace The Existing Grinder.
Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the existing grinder. The existing grinder was purchased 2 years ago at an installed cost of $55,300; it was being depreciated straight-line for 5 years. The existing grinder is expected to have a usable life of 5 more years. The new grinder costs $105,800 and requires $4,500 in installation costs; it has a 5-year usable life andwould be depreciated on a straight-line basis. Lombard can currently sell the existing grinder for $70,900 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $40,400, inventories by $29,000, and accounts payable by $57,600. At the end of 5 years, the existing grinder would have a market value of zero; the new grinder would be sold to net $29,200 after removal and cleanup costs and before taxes. The firm is subject a 40% tax rate. The estimated earnings before depreciation, interest, and taxes over the 5 years for both the new and the existing grinder are shown in the following table
Year New grinder Existing grinder 1 $43,600 $25,200 2 43600 23200 3 43600 21200 4 43600 19200 5 43600 17200
a. Calculate the initial investment associated with replacement of the old machine by the new one.
Calculate the initial investment below: (Round to the nearest dollar.)
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